There is a long-running debate in Texas about whether government should regulate payday, auto-title and other similar short-term, high-interest loans. Thus far, the Texas state government has failed to impose any non-superficial regulation. Therefore until recently, Texas was considered one of the most lenient states for lenders offering these types of loan products. However, local government regulation of payday loans has begun to fill the void left by the state, and slowly but surely, some meaningful regulation and enforcement is creeping across Texas and impacting the payday loan industry.

In Texas, payday and auto-title lending is a $4 billion-a-year industry comprised of around 3,500 businesses. The state has imposed no limits on the size of a loan or the fees involved, and as a result, it has been reported that Texans get bigger loans and pay higher fees, on average, than consumers elsewhere.

A payday loan is a short-term loan that is typically due on the borrower’s next payday. The borrower is required to agree to a payment method within the lender’s control, such as writing a check for the full balance in advance, so the lender has an option of depositing the check when the loan comes due. Loan fees can be as high as $30 per $100 borrowed, and those fees result in annual percentage rates (APR) of almost 400 percent on many payday loans. Auto-title loans are similar, but are given in exchange for car titles as collateral.

Some payday lenders give borrowers the option to roll over their loans if they cannot afford to make the payment when it’s due. In fact, many lenders encourage this. Most often, the borrower pays yet another fee to delay paying back the loan. And if the loan is rolled over several times, the borrower could end up paying hundreds of dollars in fees and still owe the original amount borrowed. For example, the average auto-title borrower nationally renews a loan eight times and pays $2,142 in interest for $941 of credit, according to a 2013 Center for Responsible Lending report.

Critics of payday and auto-title loans say the lenders pinpoint desperate people and purposefully attempt to trap them in a cycle of debt in order to collect more and more fees. Here is a quote from a New York Times article dated September 27, 2014, “We have seen firsthand how lenders use loopholes in the rule to prey on members of the military,” Richard Cordray, director of Consumer Financial Protection Bureau, said in a statement. “They lurk right outside of military bases, offering loans that fall just beyond the parameters of the current rule.” ⁽¹⁾

Supporters of the industry say lenders offer needed capital to persons who have few options. In any event, it has been reported by the Center for Public Policy Priorities ⁽²⁾ that Texans spent $1.2 billion in payday and auto-title fees in 2012, and 35,000 cars in the state were repossessed by auto title lenders.

Thus far, the majority of the legislators in Austin appear to have sided with the payday loan industry. Advocacy groups and some legislators have argued for legislation, including annual percentage rate caps, but to no avail. Lawmakers did pass measures in 2011 requiring payday and auto-title lenders to be licensed by the state and to post a schedule of fees in a visible place, but more significant measures failed to pass in 2013. Payday lenders are still not subject at the state level to any of the types of regulatory oversight, licensing and consumer protections governing other Texas lenders.

But while payday loan regulation was languishing and then shot down in the statehouse, municipal governments including Houston, Dallas, San Antonio, Austin and El Paso were passing their own ordinances. And as of now, about 20 cities in Texas have adopted payday loan restrictions to protect borrowers.

Most of the municipal ordinances follow a model that doesn’t set a cap on interest rates, but rather limits the loans to 20 percent of a borrower’s gross monthly income. Auto title loans cannot exceed three percent of a consumer’s gross annual income or 70 percent of the vehicle’s retail value. In addition, under most ordinances, at least 25 percent of the principal must be paid upon a rollover. The ordinances of Houston and other Texas cities also place a limit on the number of installments and rollovers.

Payday loan companies sued several of these cities in an attempt to invalidate the local ordinances, but they lost an important case against the City of Dallas in a state appellate court. This has emboldened cities to begin enforcing their own payday loan regulations.

However, payday loan companies in Texas have always been very adept at determining exactly where the regulatory line is drawn and creating loan products that stay just within the rules. An example of this is how they have managed to work around federal restrictions on payday loans to military personnel. For example, the Military Lending Act of 2006 set a 36 percent interest rate cap on a range of high cost loan products. But the protection applied to a narrow sliver of loans, covering only loans for up to $2,000 that lasted for 91 days or fewer. It also covered auto title loans with terms no longer than 181 days. Some lenders simply altered their products to evade the restrictions. Some offered loans for just over $2,001, or for periods that were just over 181 days. ⁽¹⁾

It remains to be seen if these lenders will continue to do the same with the municipal regulations put in place by cities in Texas, or will directly challenge or even flout these laws. If they do offer products that are in violation of city ordinances, they may open themselves up to civil lawsuits by borrowers as well as suits brought by municipal government authorities.

Payday lenders have already been targeted by federal authorities, including the recently created Consumer Financial Protection Bureau, and we will discuss that in the second installment of this post.

⁽¹⁾ New York Times Business Section, September 27, 2014, by Jessica Silver-Greenberg NY Times – Tougher Shield for Soldiers Against Predatory Lenders
⁽²⁾ Center for Public Policy Priorities, from a Report by the Office of Consumer Credit Commissioner, July 2013; Payday-Auto Fact Sheets